Economic Crisis and Global Supply Chains
AbstractMuch attention has been paid to the sharp fall in world trade associated with the economic crisis during the last quarter of 2008 and the first quarter of 2009. Alarming forecasts have been published for the whole year of 2009 and several explanations have been offered. In particular, beyond the credit crunch and the global drop in demand, it has been argued that, due to globalisation and the fragmentation of supply chains, world trade will inevitably overshoot the shock in world GDP. We contest this view using both simple accounting calculations and a simulation of the multi-region, multi-sector Computable General Equilibrium (CGE) model, which explicitly models input-output relations within and between sectors. Using the CGE MIRAGE, we ask whether the most recent forecasts of GDP change, together with a twist in the composition of demand (to the detriment of capital goods), a halt in the trend towards the reduction in trade costs and a collapse in the oil price can replicate a very similar multiplier effect on world trade to that currently being experienced. Firstly, we find that, when trade flows are deflated by the price of the world GDP, the order of magnitude for trade decline in 2009 is 8.9 percent in our exercise. However, when trade flows are deflated by the sector-specific trade prices computed by the model, the drop in world trade is much more limited (-2.4 percent). Hence a large part of the fall in trade predicted by the model comes from a relative price effect. Secondly, while this fall is still more than the –1.3% drop in world GDP forecast by the IMF in April 2009, even this magnification effect disappears when GDPs are aggregated using current exchange rates, which is the appropriate reference, rather than PPP weights. Thirdly, while, our paper does not support the hypothesis of a systematic over-shooting of trade due to globalisation and the fragmentation of supply chains, it seems likely that additional factors such as the credit shortage must have played a role in the short run to explain the sharp fall in world trade.
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Bibliographic InfoPaper provided by CEPII research center in its series Working Papers with number 2009-15.
Date of creation: Jul 2009
Date of revision:
INTERNATIONAL TRADE; CRISIS; CGEM; global supply chains; GLOBAL CRISIS;
Find related papers by JEL classification:
- F10 - International Economics - - Trade - - - General
- C68 - Mathematical and Quantitative Methods - - Mathematical Methods; Programming Models; Mathematical and Simulation Modeling - - - Computable General Equilibrium Models
- F17 - International Economics - - Trade - - - Trade Forecasting and Simulation
- F43 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Economic Growth of Open Economies
This paper has been announced in the following NEP Reports:
- NEP-ALL-2010-01-23 (All new papers)
- NEP-CMP-2010-01-23 (Computational Economics)
- NEP-INT-2010-01-23 (International Trade)
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- Sébastien Miroudot & Alexandros Ragoussis, 2009. "Vertical Trade, Trade Costs and FDI," OECD Trade Policy Papers 89, OECD Publishing.
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